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Is Trump’s tax reform in sync with global corporate tax agenda?

Last week, US president Trump set out his plans for a drastic cut in the corporate tax rate from 35 per cent to 15 per cent. But the US isn't alone in seeking to push through lower corporate tax rates.

US tax cut 'will pay for itself'

The tax cut could cost the federal government $2.4 trillion over a decade, according to the Tax Policy Center, a nonpartisan tax group. But Treasury Secretary Steven Mnuchin claims that “The tax plan will pay for itself with economic growth” – a claim that others have viewed with scepticism.

The tax reform plan is currently short on detail but, according to experts at Wharton, Penn Law and the University of Michigan, such reforms could result in “increased government borrowing to fund the revenue gap, which in turn would crowd out private investment and capital formation”. The experts also said that economic and business growth as a result of the tax cuts would fall short of the expectations of the Trump administration.

While the US currently has one of the highest corporate tax rates in the world, most companies are able to pay considerably less than the stated 35 per cent through numerous deductions allowed under the US tax code.

Long-term trend for low-rate business tax strategy

Trump's proposed tax reforms have caused consternation among Democrats and some Republicans who support a more moderate tax cut for corporates. But is it in line with the global corporate tax agenda? As noted in a report by consultancy firm EY – Outlook for global tax policy in 2017 – there is a long-term trend for countries to pursue a low-rate, broad-base business tax strategy. However, the G20/OECD’s Base Erosion and Profit Shifting (BEPS) initiative are “compelling governments to seek alternative means of tax change to drive competition”, according to the report.

The report suggests that many governments are looking at broader initiatives to stimulate business growth – rather than simply cutting corporate income tax (CIT).

EY's study found that:

  • of the 50 countries surveyed, 30 per cent intend to invest in broader business incentives to stimulate or sustain investment;
  • new or improved business incentives are being offered in 27 per cent more countries than in 2016;
  • 22 percent of countries plan to introduce more generous research and development (R&D) incentives in 2017;
  • new or improved R&D incentives now being offered in 83 per cent more countries than last year.

Governments using incentives, not just lower taxes

In the new climate of corporate tax reform, which has seen countries cooperating on coordinated tax initiatives, many governments are increasingly adopting incentives other than tax reductions.

Chris Sanger, EY's global tax policy leader, says: “Incentives can encourage and sustain business investment, allowing governments to respond to the dual pressures of continued weak economic growth and the introduction of new measures and legislation in response to tax reform in Europe and globally.”

Eleven out of the 50 countries in EY's report forecast an increasing rate of CIT. But, while Trump's corporate tax decrease goes against the grain generally, the US is not alone. Eight of the 50 countries in EY's report said they will reduce corporate income tax rates in 2017. Most of those countries are in Europe, including the UK, Luxembourg and France.

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